Don’t leave your succession plan too late

Business owners sacrifice a great deal through their working lives. It is important that they don’t leave it too late to enjoy the fruits of their success.

To ensure survival and success, business owners put their heart and soul into their businesses. They are often the culmination of a lifetime’s work with significant personal sacrifice. Amongst other things, their success or failure depends on effective leadership and maintaining a point of difference in the market. If a business is failing, owners take personal responsibility for this. It impacts on their personal reputation. Conversely when a business does well, owners feel great pride knowing that they have the tick of approval from various stakeholders.

It is well documented that the average age of a business owner in New Zealand is well in to their 50’s. At some point, a decision needs to be made by the business owner regarding when and how they exit the business. Options might include selling the business outright or selling down a shareholding over time. Both options require careful thought.

Selling Outright

Selling outright can be a lengthy process. With many business owners all looking to exit at the same time, buyers can be picky. They have the luxury of choice and businesses that are mediocre with limited growth prospects are often overlooked. There needs to be a compelling story about why someone should buy the business. This “story” is best told by way of an Information Memorandum which is a document prepared to showcase the business. It needs to be professional in appearance and give enough information to prospective buyers to enable them to decide to continue through the process or not. Confidentiality and commercial sensitivities need to be respected and so involving a specialist adviser is a good place to start.

Gradual sell-down of shares

Another option, and one that we are seeing more of, is a gradual “handing over of the baton” from the founder to the next generation. This usually involves a gradual sell-down of shares over a period of time. The advantage of this approach is that the parties are usually known to each other. Perhaps they are an employee who has worked in the business for a number of years. They know the customers, the systems and how things roll. Most importantly, they know the owner so there is already a relationship of trust and respect.

For either option, having realistic expectations on what the business is worth is important. Before anything else, owners should take advice to understand how much money they might walk away with, given current economic conditions and business performance etc. Does this money enable the vendor to live the lifestyle they seek? If not, it is possibly not the right time to sell.

Business owners sacrifice a great deal through their working lives. It is important that they don’t leave it too late to enjoy the fruits of their success. Be realistic with what your business is worth and be prepared to let go of control. Think win/win.